Acc. Final NEW vocab

Allowance for doubtful accounts

A contra-asset estimating the portion of accounts receivable expected to be uncollectible; netted against AR to report net realizable value

Accumulated depreciation

A contra-asset accumulating all depreciation recorded against a long-term asset since purchase; netted against the asset’s cost to report book value

Contra account

Any account that reduces a paired account and carries the opposite normal balance of its partner. Allowance for doubtful accounts and accumulated depreciation are the two you’ll use

Solvency

A company’s ability to meet its long-term obligations as they come due — a longer-horizon relative of liquidity

Contingent liability

A potential obligation whose existence depends on a future event, such as a pending lawsuit. Disclosed or recorded depending on how likely and how estimable the outcome is

Face value

The principal amount of a bond, repaid at maturity

Capitalized

Recorded as an asset rather than expensed immediately, because the cost is necessary to acquire the asset and prepare it for its intended use

Depreciation

The systematic allocation of a long-term asset’s depreciable cost (cost minus salvage value) to expense over its useful life

Useful life

The estimated period over which a long-term asset is expected to be productive; the divisor in straight-line depreciation

Salvage value

The estimated value of an asset at the end of its useful life; subtracted from cost before depreciating

Write-down

A reduction of an asset’s recorded value to reflect a permanent decline below book value, recognized immediately as a loss. Conservatism applied to long-term assets — write down, never up

Intangible assets

Long-term assets lacking physical substance — patents, trademarks, goodwill

Goodwill

The premium paid to acquire a company above the fair value of its identifiable net assets, representing unrecorded value such as reputation and customer relationships

Lease

A contract granting the right to use an asset for a period of time in exchange for payments, without transferring ownership

Expense (verb)

To recognize a cost as an expense immediately, rather than capitalizing it as an asset

Bad debt expense

The estimated expense of accounts receivable expected to be uncollectible, recognized in the period of the related credit sales

Net income / Earnings / Income

Revenues plus gains minus expenses and losses for the period; flows into retained earnings when the books close

Present value

The value today of a future cash flow, discounted at an appropriate rate: PV = FV ÷ (1+i)ⁿ

Default risk

The risk a borrower fails to make a promised payment; higher default risk raises the required market rate and lowers present value

Defined benefit

A retirement plan promising a specific future payout, typically based on salary and years of service; the employer bears the investment risk

Defined contribution

A retirement plan specifying only the amount contributed now (like a 401(k) match); the employee bears the investment risk and the eventual payout is not guaranteed

Other post-retirement benefits

Non-pension benefits promised after retirement, most commonly retiree health insurance

Interest

The charge for the use of borrowed money. Interest expense sits on the income statement; unpaid interest sits on the balance sheet as interest payable